XXV RETURNS-PAYMENT OF TAXES Withholding at source. Information at source. Interest. Other required information returns. Illustration of individual tax return. Illustration of corporation tax return. Payment of taxes. As explained in Chapter I, "returns" are of two kinds, informational returns and tax returns. The principal informational returns of interest to individual and corporate taxpayers are described in following paragraphs. WITHHOLDING AT THE SOURCE The 1917 Revenue Act eliminated most of the withholding, in cases of "determinable gain or income," required under previous tax laws. Withholding is required under the 1926 act in the following cases (Sec. 221 and 237): (a) Five per cent (6% under the 1924 act and 8% under the 1918 and 1921 acts) of income payable to a non-resident alien individual or partnership, except dividends allowed as a credit,2 interest on bank deposits and interest on bonds containing a tax-free covenant. (b) Thirteen and one-half per cent (12% from 1921 to February 26, 1926, and 10% during 1918-20) of income payable to a foreign corporation having no business or place of business within the United States, with the same exemptions as in (a). (c) Two per cent of interest payable to an individual or partnership, or to a foreign corporation as de1"Withholding" refers to the payment of tax by the payer of income rather than the receiver, and is much more extensively applied in the income tax laws of other countries. 2 See page 28. scribed in (b), in connection with bonds containing a tax-free clause. One and one-half per cent is withheld if a citizen or resident files with the withholding agent on or before February 1 a notice to the effect that his net income in excess of the normal tax credits is not in excess of $4,000, using Form 1000A for his notice. (Art. 361; 601). In (a) and (b), taxable income on which the 5% or 132% has been withheld must be reported in full by the individual or corporation recipient; credit against the tax payable is allowed for the amount withheld. In (c) the 2% paid by the corporation is not deductible in its return but is credited against the tax payable of the individual.1 Following are points that should be noted in connection with withholding: (a) Withholding at the highest applicable rate is required in the case of interest payable to unknown owners: this has been held to mean 2% in the case of tax-free bonds and 5% in the case of other income. (b) Since the 2% is in effect a portion of the normal tax paid by a corporation for an individual, the latter may claim exemption from having the tax paid at the source to the extent of his personal exemption and claim for dependents by filing the proper ownership certifi cate. (c) Withholding described in (a) above is not required in the case of securities issued by an individual or partnership with a tax-free covenant clause. INFORMATION AT SOURCE: INTEREST When interest coupons are cashed, "ownership certificates" must be filed, under the following circumstances, by the owner of the bond: 1 See line 51 in the form illustrated on page 281; the $24 deducted from the tax otherwise payable is 2% of the tax-free covenant interest of $1,200 shown on line 3(a). 1. A citizen or resident cashing a coupon on a bond which contains no tax-free covenant need not file a certificate. 2. If his bond contains a tax-free covenant, he must use Form 1000. But he may claim exemption to the extent of his normal tax credits for any one year and may then use Form 1001 to the extent of such credits. Should his income be in excess of the normal tax credits but less than $4,000 more, he may use Form 1000A whereby the corporation will withhold (and he will deduct from his tax payable) 12% instead of 2%. 3. On a tax-free covenant bond, only 2% need be withheld even when payments are made to non-resident aliens, to corporations having no place of business in the United States, and to unknown persons. But if the bond contains no tax-free covenant, 5%, 132%, and 5% must be withheld, respectively, in the three cases mentioned. Articles 361-374 and 1077-1079 should be carefully studied by persons responsible as withholding agents. OTHER REQUIRED INFORMATIONAL RETURNS Certain other required informational returns are: 1. Dividends (Form 1097). Every corporation paying $500 or more to any one stockholder who is an individual, fiduciary, or partnership must file an informational return thereof, due on or before March 15 (for the preceding year). They must be mailed direct to the Commissioner at Washington. If individual dividend payments were less than $500, as above described, no return should be filed. No payments of liquidating, stock, or otherwise non-taxable dividends need be reported (T. D. 3645). A person receiving a dividend for another must disclose the true owner on Form 1087 (Sec. 254; Art. 1060, 405). 2. Income payments (Forms 1096 and 1099). Any person, corporation, or other organization making payments of salaries, wages, interest, rents, commissions, or other fixed |